The Consumer Price Index (CPI) is likely to soften to 4.5% in 2017 from 4.9% in 2016, said rating agency ICRA in a report.
Key factors that will dominate CPI inflation in 2017 include monsoon dynamics, the impact of the Goods and Services Tax (GST) on prices, commodity price movements, and the Rupee – U.S. dollar exchange rate, said Moody’s Investors Service and its Indian affiliate, ICRA.
Based on the minutes of the Monetary Policy Committee’s December 2016 meeting — which revealed a renewed emphasis by some members on achieving the mid-point, or 4%, of the inflation target range of 2%-6% — the room for incremental repo rate cuts will prove limited, at 25 basis points over the next six months.
Moody’s explained that the implementation of the pending GST and other measures aimed at enhancing income declaration and tax collection will help widen India’s tax base and boost revenues. However, such a boost would only materialise over time, with the magnitude uncertain at this point, the report said.
‘Deficit sizeable’
As a result, the general government deficit will remain sizeable, and any reduction in India’s government debt burden will largely rely on robust nominal GDP growth.
Moody’s expected that India’s debt-to-GDP will hover around the current levels (at 68.6 per cent in 2015) before falling gradually, as nominal GDP growth is sustained and revenue-broadening and expenditure efficiency-enhancing measures take effect.
On the fiscal front, Moody’s said that the government would likely remain committed to achieving its fiscal deficit target of 3.5% of GDP for the fiscal year ending March 31, 2017.
However, room to reduce the deficit further to the target of 3% of GDP in the following year will be limited, due to the need for increased infrastructure spending and higher government salaries.
The government announced its intention to increase public capital expenditure in the last budget to help reduce supply-side bottlenecks and stimulate growth.
Meanwhile, wages and salaries accounted for about 50% of total fiscal expenditure, with a large, one in 10-year increase in central government compensation just implemented.
Moody’s said it expected that the government to renew its commitment to increase capital spending and address the short-term disruptive impact of demonetisation, during its budget speech on February 1.
Moody’s and ICRA pointed out that after a temporary dampening effect on consumption and investment in the medium-term, demonetisation would likely strengthen India’s institutional framework — by reducing tax avoidance and corruption — and should support efficiency gains through a greater formalisation of economic and financial activity.
The report also pointed out that in an environment of lacklustre global trade, and with economies globally facing the increasing risk of protectionism, India’s very large domestic markets provide a relative competitive advantage when compared with smaller and more trade-reliant economies.
